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Frequently Asked Questions Pay & Leave

Student Loan Repayment

Pay the employer's share of social security and Medicare taxes on the loan repayment;

Withhold and pay Federal income tax withholding (and appropriate State and local income tax withholding) on the loan repayment;

Withhold and pay the employee's share of social security and Medicare taxes on the loan repayment; and

Report the loan repayment and taxes withheld and paid as required under Federal law and applicable State and local laws.

This answer was provided by the Internal Revenue Service (IRS). For further guidance/clarification on this issue, agency representatives may contact IRS (Federal, State and Local Governments) at (202) 283-9665.

Yes. Because a student loan payment owed by the employee is made by the Federal Government on behalf of the employee, the payment is includible in the employee’s gross income and wages for Federal employment tax purposes even though it is made directly to the loan holder. Consequently, the agency must withhold and pay employment taxes from either the employee’s regular wages, the loan payment, or a separate payment made by the employee. The applicable employment taxes include Federal income taxes withheld from wages (and, where appropriate, State and local income taxes) and the employee’s share of Social Security and Medicare taxes. Tax withholdings must be deducted or applied at the time any loan payment is made. (See 5 CFR 537.106(a)(6).) The agency may choose among several different methods for withholding taxes. (See Questions and Answers on Tax Liability.) Please note the implications of deducting taxes directly from a gross loan payment. For example, if the agency has approved a student loan repayment benefit of $10,000 and the employee’s tax deductions are $3,000, then the agency will make a loan payment of $7,000. The full $10,000 counts toward the maximum limitations described in question #4.

This answer was provided by the Internal Revenue Service (IRS). For further guidance/clarification on this issue, agency representatives may contact IRS (Federal, State and Local Governments) at (202) 283-9665.

The student loan repayment authority itself does not preclude payments for employees who have defaulted on their student loans. However, agencies may exclude them by so specifying in their agency plans.

Any employee who does not satisfy the terms of the service agreement is required to reimburse the Government for all loan payments received. However, agencies may waive recovery if they determine it to be against equity and good conscience or contrary to the public interest. (See 5 U.S.C. 5379(c)(3) and 5 CFR 537.109(e).)

An agency is obligated to pay amounts required to be
withheld from an employee's wages even if those amounts are not actually
withheld. Federal tax law requires agencies, like other employers, to
withhold employment taxes from employees' wages. The repayment of
student loans, however, may be subject to such terms, limitations, or
conditions as the agency and the employee may mutually agree.
Consequently, an agency's repayment of the student loan may be made
contingent on an employee's payment of employment taxes (including
income taxes and the employee's portion of social security and Medicare
taxes) to the agency. In this case, to fulfill its tax obligations, the
agency must–

Determine the correct amount of employment tax withholding on the
loan repayment using either the regular method described in Question 6
or the flat rate method described in Question 7;

Obtain a check or other payment from the employee for the amount determined above;

Make the loan repayment and deposit and report on Form 941 an
amount equal to the payment received from the employee in accordance
with normal deposit and reporting procedures; and

Report the income, social security, and Medicare tax components
paid by the employee in the appropriate boxes of Form W-2. These amounts
are not included as income or wages in Boxes 1 , 3, and 5 of Form W-2.

This answer was provided by the Internal Revenue Service (IRS). For further guidance/clarification on this issue, agency representatives may contact IRS (Federal, State and Local Governments) at (202) 283-9665.

The Federal agency calculates the correct amount of employment tax
withholding on all wages paid during the payroll period by treating the
supplemental wages and the regular wages as a single wage payment for
the payroll period.

The Federal agency calculates the correct amount of employment tax
withholding on the regular wages paid to the employee during the payroll
period.

The Federal agency subtracts the amount determined in step 2 from
the amount determined in step 1 to calculate the amount of any
employment tax withholding due with respect to the supplemental wages.

This answer was provided by the Internal Revenue Service (IRS). For further guidance/clarification on this issue, agency representatives may contact IRS (Federal, State and Local Governments) at (202) 283-9665.

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